Denmark's central bank says risks are building up in the financial system

COPENHAGEN (Reuters) - Denmark’s central bank said Wednesday that several indicators suggest risks are building up in the financial system, and a few of the country’s largest banks do not have sufficient capital to meet buffer requirements.

A cyclist passes the entrance of the Danish central bank, also known as Danish Nationalbank, in Copenhagen, January 22, 2015. REUTERS/Fabian Bimmer/File Photo

The warning echoes similar concerns of some pundits, although the European Central Bank has been playing down worries that risks are building in the financial system.

Denmark’s largest banks and mortgage banks, including top lender Danske Bank (DANSKE.CO), saw record high profits in the first half of 2017, which boosted optimism in the financial sector and helped increase risk appetite.

“Several banks are stepping on the accelerator by easing credit standards and granting loans to more vulnerable customers,” central bank governor Lars Rohde said in a statement.

In particular, several banks are increasing lending to cyclical industries and to vulnerable households with high debt ratios, the central bank said.

Despite high profits among banks, their core earnings — adjusted for temporary factors such as high value adjustments and low impairment charges — have tended to decline since 2015, driven down by low interest rates, the central bank said.

Denmark has had a negative interest on bank deposits for five years and currently keeps its key rate at minus 0.75 percent. It keeps its currency, the Danish crown, close to 7.46038 crowns per euro. EURDKK=D3

Low interest rates combined with low risk perception during the current economic upswing has led to an increase in demand for advanced products with complex risk profiles in international markets, the central bank said.

With house prices rising, the central bank warned against a repeat of what happened during the last financial crisis, when home owners raised new loans against home equity as collateral.

In its twice-yearly stress test, it said a few of the largest banks fall short of their capital buffer requirements in a severe recession scenario, while the rest meet the requirements albeit with a narrow margin.

The central bank encouraged banks to build up capital now for use as a buffer when the next financial downturn happens. That will help them meet new EU and Basel Committee requirements currently under discussion.

Denmark’s economy is set to grow by 2.3 percent this year, the highest in more than a decade and higher than the euro zone.